What is Your Debt Personality?:

Student Loans

Choosing a Repayment Plan

As you may or may not know, you have about 6 months after graduation before you must confront your student loans. After this period, you’ll be required to make a decision on how you’d like to repay them, and you’ll be expected to follow through with this payment plan. There are two general types of student loan repayment plans: the traditional plan and the income-driven plan.

The traditional repayment plan calculates what you will need to pay every month in order to repay the loan in 10 years – your payments stay the same throughout the entire repayment period. Depending on the amount you owe from student loans, this calculation may result in extremely large monthly payments.

Income-driven repayment plans use your income to determine what your monthly payments should be, generally taking a set percentage of your earned income. Income-driven plans may operate only within a certain period of time, and if the loan is not paid in full at the end of this time period the remaining balance is forgiven. If you don’t actively choose a repayment plan, you automatically be placed on the traditional one, but you can change this at any time.

It might sound nice, but income-driven plans aren’t an easy way out. Your repayment plan will end up asking for 10-20% of your discretionary income, and forgiveness won’t be offered until you’ve been paying this amount for 20-25 years. However, these plans offer eventual financial freedom for graduates who are deep in student debt with no other sign of escape.

Income-driven plans may be a good temporary option for graduates who are starting out with a lower income, especially if the traditional repayment plan would have them paying over 15-20% of their income. A warning to those who are considering this route: remember that your education is not the only investment you’ll be making in your adult life, and that pushing off paying these loans may also push back home ownership, being able to afford a family, and retirement. Whenever possible you should be contributing more than this bare minimum to your debt repayment.

You also have the option to consolidate your loans. This allows you to take all of the individual loans you took out for each year/institution and combine them into a single payment you make to one organization each month. This may also lower the required payment, but keep in mind that this is not lowering your overall debt. If you plan to utilize this lower payment option for an extended period of time, just remember that it will take longer for you to ultimately pay off your loans and that you will accumulate more interest in the process.

Deferment and Forbearance

Deferment and forbearance are not technically the same thing, but they perform in much the same way. These allow you to stop making payments to your student loans for a predetermined period of time if something damages your financial situation (such as losing a job or prolonged hospitalization.) During deferment, you are not required to make any payments to the principal and your loans will not collect interest. During forbearance, you will either not be required to make any payments or your normal payments will be reduced, but your loans will still collect interest.

Requests for either of these special allowances should be made directly with your loan servicer (the organization that issued and handles your loan.) In the case of the Federal Perkins loan, you may need to get in touch with the Financial Aid office of the institution you attended.

Discharge and Forgiveness

Before we dig into the details here, please note that different criteria apply to different loans, so be sure to confirm what your specific loans qualify for (the Federal Student Aid website or your institution’s Financial Aid office are good places to start) before moving forward.

There are a limited number of life situations that could qualify you for student loan forgiveness. One of these we already mentioned: reaching the predetermined time limit of an income-driven repayment plan. But let’s talk about a few more:

TPD Discharge

A Total and Permanent Disability Discharge is granted when you have been physically disabled to the point of being unable to work. This is available to both service-injured veterans and civilians, but requires a vigorous verification process to ensure that you are fully incapacitated and unable to maintain gainful employment.

Death Discharge

This should be rather self-explanatory: if the borrower dies, the outstanding student loan balance will be discharged.

Discharge in Bankruptcy

Student loan forgiveness in bankruptcy is fairly rare, and requires proof that you a fully incapable of repaying your student loans without immense hardship and have made a good-faith effort to meet repayment. This is available when filing Chapter 7 or Chapter 13 bankruptcy.

Teacher Loan Forgiveness

If you are a full-time teacher who has served a low-income community for five consecutive years, you may be eligible for student loan forgiveness. This only applies to loans borrowed after October 1st, 1998, and a maximum of $17,500 will be forgiven.

Public Service Forgiveness

If you have completed 10 years of income-driven payments while working for a government or non-profit organization, you may be eligible for loan forgiveness. The loans must be in good standing, and only payments made after October 1st, 2007 will apply to the 10 years of repayment.

Just like secured debt, remember that your student loans are ultimately an investment in your future. If you are an incoming student who is hesitant about loans, take this information into account when deciding to take on additional expenses like meal plans or school-sanctioned travel. Student loans are very much worth it when handled responsibly, but make sure you are prepared for the consequences of borrowing more than you can afford.

Student Loan Checklist:

Choose the repayment plan that best suits your post-graduation finances. Remember that you are able to change this repayment plan in the future if your situation changes.

Follow through with this repayment plan, contributing more than the minimum whenever possible.

Know your rights in the case of forbearance or deferment.

Be aware of what student loan forgiveness you might qualify for in a worst-case scenario.